In the battle over forced insurance, homeowners are beating the banks

Force-placed insurance has long been a common practice among banks, and for just as long it’s been a bane to consumer advocates who think it\’s a rip-off for people who can\’t afford it.

Whatever the case, the practice is one that’s been withering in a scorching string of lawsuits.

Citigroup Inc.
agreed this month to settle a class-action lawsuit brought by homeowners who said the practice was unfair, and J.P. Morgan Chase & Co.
is waiting for final court approval for a similar settlement. Bank of America Corp.
and Wells Fargo & Co.
are preparing to sign settlements of their own. And the lawsuits now are rippling out to smaller banks.

The practice is a polarizing one. It’s a favor to homeowners, if you ask the banks – who prefer, by the way, to call it the nicer-sounding “lender-placed” insurance. Ask the critics, though, and it’s a greedy bid by the banks to line their own pockets at their customers’ expense.

Here’s how it works: If you have a mortgage, it probably includes a provision saying that if you stop paying for your property insurance, then the bank can buy some for you and stick you with the bill. Makes sense, right? If your home isn’t insured and it gets destroyed in a storm, you’d be stuck making mortgage payments on an unlivable house, which you don’t want. Or you might just walk away, which the banks don’t want (and you don’t want either, since you’d ruin your credit).

One problem, though, is that the policies the banks buy are usually a whole lot more expensive than what homeowners could buy for themselves on the open market – sometimes 10 times as expensive, according to testimony from consumer advocates. The banks and the companies that sell force-placed insurance, like QBE and Assurant Inc.,
say this is because they have to insure every house they’re presented with, rather than picking and choosing the least-risky ones. Which is true, but it’s also worth noting that force-placed policies don’t carry the same amount of coverage as a standard insurance policy that you might buy for yourself on the open market. For instance, force-placed policies don’t usually cover lost possessions or the cost of staying in a rental home while a house is repaired.

What’s more, the banks often get kickbacks – or what they politely call “commissions” – from the insurance companies. Though the practice is fading, thanks to increased regulatory scrutiny, it still creates a culture where banks are not exactly incentivized to give customers a grace period if they miss a property-insurance payment or two.

Over the past few years, homeowners have been bringing lawsuits against the banks. Just recently, they’ve started to score some victories.

Last year, Wells Fargo and QBE said they would pay up to $19 million to affected Florida homeowners, who could file to get refunds for 25% of the premiums they’d paid on policies that the bank stuck them with. According to Adam Moskowitz, an attorney representing homeowners in that lawsuit and others, it was the country’s first major settlement over force-placed insurance.

Since then, other settlements have covered homeowners nationwide. In September, J.P. Morgan and Assurant agreed to pay some $300 million to about 780,000 homeowners. Citigroup and Assurant agreed to pay $110 million in a settlement announced this month.

The J.P. Morgan and Citigroup will give homeowners a refund of up to 12.5% of the premiums they paid on hazard insurance that was force-placed on them. The settlements also require the banks to stop accepting commissions from the insurance companies for six years.

A Citigroup spokeswoman said the bank was pleased to reach the settlement. She added that the bank stopped accepting commissions on force-placed hazard insurance last year.

A spokesman for J.P. Morgan said the settlement “will have no expected impact on our financials.” He added that the bank had not accepted commissions “for many years” from the companies where it buys force-placed insurance.

Moskowitz said this week that homeowners have also reached nationwide settlements with Bank of America, Wells Fargo and the British bank HSBC Holdings PLC,
though he declined to reveal details.

Spokesmen for Bank of America and HSBC declined to comment. A Wells Fargo spokesman said the bank had had the same policy “for some time.”

All the settlements, except for the Wells Fargo Florida deal, are still waiting for court approval before they’re final. Some homeowners have protested the proposed J.P. Morgan settlement, saying it lets the bank off too easy.

Nichols Kaster, the law firm that led the lawsuit against Citigroup, has other force-placed insurance lawsuits filed against other banks, including U.S. Bancorp.
Moskowitz’s law firm, Miami-based Kozyak Tropin & Thockmorton, has also filed lawsuits against PNC Financial Services Group,
Ocwen Financial Corp.
and SunTrust Banks Inc.

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